Key Points
- French markets tumbled after the resignation of the country’s prime minister.
- The resignation has deepened a long-running political crisis in France.
- Investors are worried about the prospect of snap elections and the government’s ability to pass a budget.
- French government bonds and stocks fell sharply, and the euro weakened. The risk premium on French bonds has hit its highest level this year.
French financial markets took a nosedive on Friday after the resignation of Prime Minister Sebastien Lecornu plunged the country into yet another political crisis. The move has investors worried about the prospect of snap elections and the government’s ability to tackle France’s massive budget deficit.
The reaction in the markets was swift and severe. French government bonds fell sharply, with the gap between French and German bond yields—a key measure of risk—hitting its highest level this year. The main stock index in Paris, the CAC 40, dropped 1.5%, with banks taking the biggest hit. The euro also weakened against the dollar.
This is the latest chapter in a long-running political saga in France. A string of prime ministers have failed to push unpopular but necessary budget cuts and tax hikes through a fractured parliament. “To lose one prime minister is unfortunate, but four looks like a major crisis,” said one analyst.
The real fear is that the ongoing turmoil could eventually force President Emmanuel Macron to resign, which would throw the country into even deeper chaos.
French bonds, once considered a safe-haven investment, are now seen as one of the riskier bets in the Eurozone. Fitch Ratings recently downgraded France’s credit rating, putting it on the same level as Belgium.
For now, investors are in a “wait and see” mode, but the political uncertainty is clearly taking its toll.
